In this Upside Avenue Educational Webinar, guest speaker Jim Denholm, Founder and CEO of IronBridge Private Wealth talks about investing during times of volatility. Jim addresses:
- Why diversification fails when you need it the most.
- The two biggest mistakes investors make and how to avoid them.
- Foundations of building a reliable investment process.
Listen on Anchor.fm or on Spotify
Watch the YouTube video here:
Jessica: So, welcome everyone and thank you for joining our Upside Avenue Educational Webinars Series. This series is developed with your input. We surveyed our investors and followers to find out what financial and investment topics everyone is interested in learning about, and then we look for subject matter experts all over the country. Who can speak on these topics in hopes of providing you with knowledge and confidence to discover your Upside. Watch your email for information about next month’s webinar and will also share it through our social media channels. So, today’s speaker is also a fellow Austinite. He has won numerous awards for helping clients pursue their financial goals. Prior to founding Iron Bridge, he’s been recognized as Wells Fargo’s Premier advisor for 10 years in a row and he received a nomination as a Barron’s Top 1000 Advisor. No stranger to working with the big players, he also spent time in his career with JP Morgan Chase and Morgan Stanley Dean Witter. His commitment to service also carries over to his involvement with the local Austin community. He currently serves on the board of the Austin Symphony and the Dell Medical Children’s Trust. As husband and father to their two sons, they can be found enjoying everything that Austin, TX has to offer from live music to cheering on the Texas Longhorns. So, please help me welcome Founder and CEO of Iron Bridge Private Wealth, our guest speaker and friend Jim Denholm. Welcome, Jim. Thank you for joining us today.
Jim: Thank you for having me. Excellent. Well, thanks everybody for joining us today. It’s enjoyable to be invited by-by the good folks that Upside Avenue to participate in this. Before we get started, I would like to say that we do have, you know, we are working from home and we do have a couple of small kids and a couple of big dogs. So, if there is any distractions in the background, please, please forgive any-any background noise but, you know, when we set this up a few months ago — is actually the early part of this year that Upside approached me about doing us a webinar that dealt with protecting portfolios, managing during times of volatility, and wow did we time this thing right? We have seen a little bit of volatility this year and so hopefully this is going to be a useful-useful webinar for-for everyone. We would like to keep it pretty open if you do have questions, please put that in the question and answer will try to get to those. Throughout the meeting we will have a section dedicated at the end for Q&A as well, but we would like this to be pretty interactive, so, with that, let’s go ahead and get started. Like Jessica said, we-we — here’s-here’s my background. I won’t go over it again. I’m founder and CEO of Iron Bridge Private Wealth. Iron Bridge is a registered investment advisory firm. We deal with individual clients in do portfolio management financial planning. We are very active investors with strong risk management. We do comprehensive planning services and we have flexible fee options. If you’d like to learn more about us or get on our email distribution list, you can visit us at ironbridge360.com. So, let’s talk about what we’re going to go through today. You know, investing during times of volatility there is no one right answer. There’s a million different ways you can do it, but let’s talk about some of the bigger things that that people address. So, first of all: 99% of the investment industry based portfolio risk management on asset diversification. Unfortunately, that tends to fail when you need it most, so, we’re going to go through and talk about that. We’ll talk about the two biggest mistakes that investors make, how you can try to avoid those, and then talk about the foundations of building a reliable investment process. If we do have, time permitting, we’re going to go over a brief-a brief market review, but we would prefer to have time to answer all of your questions. So, before we get into it, it is definitely been a volatile market. This is the S&P 500 over the last two or three years. We’ve seen multiple very large declines, so, this this chart along the bottom shows that starts at 2018. We saw a 10% decline. Early in ‘18, followed by a 13% rise, followed by a 20% decline, followed by a 44% rise. Then we had our COVID crash in February and March the-the S&P from peak to trough was-was a little over 35% decline in just over six weeks. That is definitely a market crash. By any measurement. Not to be outdone, the Bulls came back and we saw a 60% increase from the lows. A pretty amazing-amazing surge over the last few weeks we’ve seen now a little bit over a 10% decline, so, we have definitely seen some volatility over the last few years and it’s to be seen whether this whether this continues or not, but we’ll talk about some ways that we can help you address it. Long term bear markets, bear markets are down markets, they can last much longer than many people think possible, so, risk management is not just something that you use temporarily.
There can be very — as we see on this chart — there very long periods of time. Where the market is essentially flat, this is a long term chart of stocks that goes back to the late 1800s and we can see there-there are 50th started with a 24 year period of flat markets. A 27 year period following the 29 crash. In in the 70s we had 15 years of basically no price movement and then 2000 to 2015. We had another 15 years where basically prices were flat. So, if you’re an investor and you’re nearing retirement, you’re at retirement and you’re basing your long term projection on markets always going up: you need to be prepared for the potential for there to be very long periods of flat to down markets. This is really where risk management comes in, and investing and in having the tools to invest in a volatile market become very, very important. So, let’s talk about diversification. It’s-it’s failure when you need it, and most diversification is a good starting point. It’s better than nothing, but it’s not quite as useful as many people think. And as many advisors sell people on, this was started by a gentleman named Harry Markowitz. In the 1960s he developed what’s called Modern Portfolio Theory, and it’s based on the on the assumption that a diversified portfolio of assets so having different assets in your portfolio stocks, bonds, cash, commodities, U.S. stocks, international stocks… That by having a mix of these different assets will ultimately lead to higher returns, but also lower risk than a more focused portfolio, and one of the key quotes that that Harry Markowitz made regarding diversification and asset allocation. Is that: To reduce risk that is necessary to avoid rep–avoid a portfolio whose securities are all highly correlated with each other. Now this means how they perform together. So, if you have two different stocks, for example, and they go up and down with the same rhythm and up and down at the same time, you’re not getting any benefit from owning those two different types of securities, so, I an ideal portfolio in order to manage risk, has things that are non-correlated that when they fall you have some predictability that other parts of your portfolio are not going to fall as much or not going to fall at all. So, let’s take a look — this is this is very good in theory. Mr. Markowitz was an academic. He did not necessarily practice in the financial world. So, let’s take a look at some real life examples.
Well, first of all, let’s look at a sample diversified portfolio so. Very common if you if you work with an advisor, if you worked at a big bank, if you’ve read anything from Fidelity or Vanguard, a lot of it is preaching modern portfolio theory and diversification. So, a sample portfolio might have 30% in large cap stocks, have some small cap stocks, international stocks, emerging markets, high yield bonds, more diversified, kind of broad based bonds, maybe some commodities. And the idea is that in in if we go through a period like we did in March where we have this 35, and in some markets, up to 50% decline. That some of these assets are not going to be correlated. But let’s really look to see if that’s the case. Here is a look at two different periods of time. So, we have 2008 on the left and 2020 on the right. I’ve zoomed in so if we want to focus on the chart on the right, this is asset performance of those different investments in this COVID crash. So, these the various lines represent the S&P 500 with large cap stocks, the Russell 2000 small cap stocks, international stocks, emerging markets, high yield bonds, the US AG Bond Index, gold, silver, some publicly traded REIT’s. So, what we see is that for looking at this chart on the right, when-when markets underwent stress and when you needed to have different assets performing differently, it did not work. Correlations rise when markets undergo stress. This is not just unique to 2020. The chart on the left shows the summer and fall of 2008, when the bulk of the financial crisis sell off was happening. The same assets. Everything became very highly correlated when markets undergo extreme stress. This is the case in 2020. That’s the case in 2008. It was the case in some mini crashes in 2015 and 2016 when the US debt was devalued in 2011. This happened in the tech bubble burst in 2001 and 2002. This happened in 1987. It happened. It happened various times during the 70s. It happened during the 30s. It happened in the early 1900s. It happened in the late 1800s. This is not a unique phenomenon that is a result of technology or news spreading fastly, or the ability of people to react. This is something that happens every single time the market undergoes stress. So, if-if we are looking at what might be a better way to approach it — at Iron Bridge, we think one there is one asset that’s predictable in in times of stress and that’s Cash. Cash is King, the ability to move to cash is the single most important risk management tool that you can use. So, it’s my it sounds very easy. It sounds a little simple but creating a way to systematically increase and reduce cash exposure within your portfolio is more difficult than it than it seems, but there are opportunities and risk of using strategies like this. The obvious opportunity is that you reduce your volatility. Cash will not fluctuate when markets undergo stress. It’-it’s predictable. It is non correlated. You don’t have the exposure to downside like you do with these other various assets that are-are thought to do well in periods of volatility. So, you can reduce your volatility new portfolio. You can protect your portfolio when times of volatility rise and if you’ve been invested for a period of time you can lock in some of those profits. So, using cash is a very-very effective tool, but there are some risks associated with it. We call it a whipsaw risk. There’s if you if you sell, you’re not always guaranteed that the market is going to keep going down. There’s times where you sell in the market starts to recover, so, if you have a-you might have to get back in at a higher price than-than which you sold. There’s also some potential tax implications if you do have long term gains and you-you have some turnover and you’re moving part of your portfolio to cash, you could increase your net tax exposure. We believe that both of those risks are more than compensated by having a more predictable way to reduce volatility. So, we think cash is King. I would take a little pause to see if we have any-any questions. Jessica, do you see if we have any questions yet? It doesn’t look like it on my end, but –
Jessica: I don’t see any at the moment.
Jim: OK, great. So, so diversification. It is like a science, a good-it’s a good foundation. It’s better than nothing, but it is not necessarily the end all be all like many people say. Changing gears the if you have the ability to move to cash or you have cash in your portfolio or your following markets. If you don’t have just a purely buy and hold mentality with your overall portfolio, there are really two big mistakes that we see investors make all the time and successful investing really only occurs when you have the ability to control your emotions. Howard Marks, let’s see here. Howard Marks is one of my favorite investors to read. He has a number of absolutely wonderful books. His latest one is called Mastering the Market Cycle. Highly recommended if you can get your hands on that, you can get it through Amazon or anywhere else and he had a quote that was: The biggest investment errors come not from factors that are informational or analytical, but from those that are psychological. It is within us -individual investors-that lie the problem, an understanding that can help you start to approach a solution. This is-has been sort of proven in plays out multiple times. This is a chart from Russell Investments. You can find many different versions of this, but there is an emotional investment cycle. If you’ve invested at all in stocks, you’ve probably experienced all of these at some point in less, and if you’ve invested in 2020, even probably invest-you’ve probably experienced all of these at some point. But, basically, it’s the-the how you feel about your investment is very much at odds with what your potential risk return is. So, if we look at the point of maximum financial risk over here on the left side it’s typically when you think that nothing can go wrong. Do you experience good growth in an individual stock or your overall portfolio you are excited about-about how your portfolio has done you-you get to the point where you feel like you can do nothing wrong. And typically, that’s when you should be most cautious. But what tends to happen is that as we go right down the side of that slope. The market starts to sell off a little bit or your stock starts to sell off a little bit and the initial reaction is denial. Say, well, it’s you know things are-are good.
The economy is doing well the company’s in good shape. You know, this is just a little blip. It starts to sell off a little bit more. You start to feel a little bit of anxiety. You start-start to get a little more anxious about it. Well, maybe this is turning to something a little bit. A little bit bigger than-than what I thought it was, but that’s OK. I’m gonna-I’m gonna hold it in and write it out. You start to get fearful that, you know, maybe it’s down 10 or 20 or 30% and you really start to worry about what this could do to your long term financial health. You then get into a depression and start to panic, and then capitulation is a-is a sign of just throwing in the towel. We probably all have done this at some point. We didn’t quite see that a lot this year. In 2008 and 2009 we saw people do this very widespread, you know, you just say I can’t take it anymore. Get Me Out, I’m gonna sell. You know what? What am I doing? I ruined my retirement. I’m going to have to work for another 10 years and you just throw in the towel. That’s typically when you have the best opportunity, so, as the market starts to go up. Their skepticism, and he say, well, look, we’re experiencing it right now, despite a very strong move off of the lows. Despite the last couple of weeks sell off, you know 60% move off the lows. We’re still seeing a lot of people that are skeptical of this market. That the economy just is not in good shape. The we’ve got an election coming up so a lot of skepticism out there is actually pretty favorable for the overall investing environment. So, the key here is to really understand your own emotions so that you can try to combat those and avoid making mistakes. So, let’s move on to the first mistake.
Jessica: We actually do have a question that’s popped up.
Jim: OK, great.
Jessica: It says: what is the current amount of cash protected by FDIC in a bank account? If you have a family-if you have family members do, do you get extra coverage for each person? Do they also have to be listed on the cash account?
Jim: Yes, it’s per-per type of-of account. So, if-if you have an individual account, it’s $250,000 that’s FDIC insured If it’s a joint account with your spouse or parents or something else that you each would get 250,000 so, so that would be 500,000. You have a retirement account that would be an additional 250,000, but the FDIC insurance part of it is not necessarily the most important part. The most important part is essentially being out of the market. There are various cash equivalents that are just as good as-as FDIC coverage. Maybe it doesn’t give you a guarantee, but the idea is that you reduce volatility that you don’t have exposure to that downside. Many firms will use multiple FDIC coverage. For example, our custodian where our clients have accounts are as Raymond James and they have deals with ten different banks, so, they have $2.5 million of FDIC coverage. So, it varies. You know, by each individual firm and who you’re dealing with. But an as an aside, I worked for Wachovia when Wachovia was essentially going bankrupt. If anybody still remembers that bank. And you know, if things get really bad that FDIC coverage may or may not actually, pay so the idea here with cash is. Something that doesn’t have fluctuations. You know. It could be very short term Treasury bills. It could be a Fidelity money market fund. It could be FDIC insured cash so, but the idea is that it’s-it’s out of fluctuation. It’s not in something that would fluctuate. So, good question. So, back to the mistake. The first mistake that investors make is simply staying invested too long. You we like to talk about this internally. We like to talk about this with our clients. We don’t want a small loss to turn into a big loss. And again, easier said than done. There is a-so, this is the chart of the S&P 500 updated through yesterday and this is through this part of this year. It’s about the last four months or so. We’ve had a 10% pullback. What if the market does this? What? What if it continues to sell off? We see something similar to what happened in March. You know you-you want to have some kind of exit. Personally, we don’t care why we don’t care. If markets are falling because of the Fed. If markets are falling because of the election. If markets are falling because the economy is in shambles, or if it’s World War three, or if it’s a blip in the road. We-we don’t care why we want to understand why we want to understand the context.
But markets are very, very complex systems and it is-they are too complex to be able to predict with any consistency or regularity. So, we’re trying to remove our own ideas of what the market should or shouldn’t do in and remove our own emotion from it and just deal with what is not how we wish it to be. And the easiest way to do this is with a stop loss, so, a stop loss is simply a predefined exit. You can have this on one position. You could have it on every single position in your portfolio, so, if you’re invested, what is your exit? You could do — there’s-There’s a million different ways to define what your exit is. We typically look at if it’s a certain percentage drop, so, so maybe an 8% drop from the high would cause us to sell. We do have some different stop losses that are based on what’s called relative performance. So, how are these particular assets doing versus the S&P 500? A lot of times will have kind of signals that are that are combined if-if it drops a certain percentage and these other conditions are met. We would then sell. But the idea is that you have it planned before you need to implement it so that you’re not trying to figure it out on the fly. This is a very, very simple thing. It’s very, very difficult to implement. But it’s-it’s, again, if the market wanted to go down 50% from here, having a predefined exit, having a stop loss would help protect your portfolio much better than having just a diversified portfolio an-or a buy and hold portfolio. Some of the risks of a buy and hold portfolio are simply you lose the commodity of time that is the single most valuable commodity we have as investors: is time. And if you if your portfolio experiences big losses, you-you lose that commodity of time, so, staying invested too long is a very-very common mistake. The second common mistake is its twin brother and it is staying in cash too long, so, you’ve taken steps to, let’s say, let’s say you-you had a predefined exit. You had a stop loss that was triggered and you moved your-your positions to cash or you moved a portion of your portfolio over to cash. Now what? What if the market does this? You know this and it doesn’t go down 50% and it turns and starts heading higher. Very-very much a reasonable thing that we could expect right now. The Fed is massively printing money. There are tremendous uncertainties out there, but-but the-the market could easily head much higher from here. So, what if you did move to cash, what then? The ironic thing is, if you-if you develop a system to be able to get out, many times getting back in is much harder. It’s much more emotional. You want to be, right. You know, you’re-you recognize the risks that are out there, and we saw that. We see many people, you know, that we talked to this year are doing the same thing. You know, they have a lot of cash, they’ve taken steps to protect their portfolio, and they’re very skeptical. There-there’s a lot of potential risks, but what do you do? So just-just like if your long and you own a stock or you own stocks or whatever asset and you have a predefined exit, it’s equally as important to have a pre-defined reentry. And have that something that is not based on how you feel about it because when you feel good about doing it, it’s probably too late. We’ve probably missed the bulk of the of the rise, so it needs to be very, very objective and there needs to be buy criteria that you lay out beforehand, because when it’s time to implement it and it’s time to execute it, chances are-you’re not going to want to you just sold. You know, a couple weeks later, the market reverses. You were wrong and it’s hard to admit that, so, there’s a various ways that you can- you can do that at different price levels. So, for example, you see the high of this on-on this chart was about 3600. You could say if it gets above 3600, I’m going to move back in. That you could-you could do a relative strength like we talked about. You could look at various chart patterns there-there’s, again, there’s a million different ways to of criteria to do it. But having a pre-defined entry is incredibly important. It allows you to participate in these markets even when you don’t want to, even when you don’t think it’s the right time to do it. What you think about how the market will-will happen? I’ve been in this business for 20 years and I’ve seen everything happened that I thought would happen that I-that I never thought was possible. But again, they’re very complex systems and I would try to avoid trying to predict what’s going to happen. Just ric-recognize what is actually happy. Name and have a predefined strategy. Any-any, I’ll take a little pause for questions here before we go onto the third section. Nope. So, so let’s talk about some of the foundations and we’re going to use an example that we actually use with our client portfolios in what are some of the foundations to build a reliable investment process? First of all, as I’ve said, there is no perfect system. Markets are incredibly complex. There is no one system that will always work, but there are unlimited effective systems and what we’re really trying to do is find an effective system to grow wealth and to protect wealth.
One of the things that I think is very important, one of the philosophies that I believe is very important in investing is stoicism, and that’s a recognition of what is not what we think should be, and a Peck a-Epictetus was an ancient Greek stoic philosopher. He was actually a slave early in his life, and he essentially became a very well known stoic philosopher. When he has a quote that: It is not what it’s not, what happens to you, but how you react that matters. We can’t control what the market is going to do. When you buy a stock or you invest money into anything, you don’t control the outcome, so, you need to be able to control your actions with what happens after you make that purchase or after you make that sale. So, if you don’t read Stoicism, I would suggest it. If you’re considering being a little bit more hands-on in the market, but we have to recognize our own psychological flaws. So, four pillars that we believe should constitute a successful investment process. Again, simple to discuss but difficult to execute, and we’re going to-we’re going to use each of these four pillars in a real life. What we use a simplified version of what of a portion of portfolios that we use for clients. So, first is developing a repeatable process it if you can get lucky once or twice or three times or five times, but understanding why you made a decision and being able to repeat that decision is absolutely critical, you know, that-then you can start to take some of the emotion out of it, which is the second piece is that you want to remove your own emotion from this process. It is very easy to get greedy and fearful and skeptical an optimistic that may or may not be appropriate for that given time in the market. So, you want to be able to remove your own emotion from the process. Then ultimately, what we’re wanting to do is, in a good market, we want to participate in it. We want that account value to go up regardless of why you don’t always have to implement risk management processes. Markets tend to go up 70 to 80% of the time. So, you don’t need to be constantly having executing your risk management strategy, but when markets get volatile, in those bad markets, you need to have a system that you can implement quickly. So, participation in good markets and risk mitigate in bad markets. So, let’s-let’s look at an actual strategy, and we’re going to talk about all four of these pillars here, so, this is a chart of the S&P 500 going back a couple of years. Like I say, this is sort of a simplified example of what we do, but this is a essentially a trend model, and the blue line on the top is the S&P 500 index. The gold lines are one of our. Objective price measurements that we use to determine when we get out and when we get in. So, if we’re above those gold lines, we want to invest. If it’s if the market is below those gold lines we for the most part, want to be out. Again, there are some complexities to how we’re you know, the things that we’re doing with our individual clients, but this is sort of a simplified version of it. So, like I say above, those gold lines invest below cash. So first of all, we want to have a repeatable process. These are objective signals that is not based on what we think is going to happen. So, if, because how we view the market will change, we can’t go back and say OK, well, in in 2009 at the market low, what would we have done? What would our market predictions have been? We want to be objective, so, we need to be able to have a process that takes our emotion out of it and again has-has objective signals that’s given to us by the market. The remove the emotion so these signals are not, again, like I said, not based on how we feel. This is purely a data driven algorithm. Expression of market price. It has no info on how what we think about-about what may or may not happen is not a factor in this particular signal. In price is everything, so, if we’re going to participate in good markets and avoid bad markets, here’s a really simple way to do it. You know, for the most part, for the first third of the chart highlighted in the green box, we’re above that gold line we want to invest that that’s giving us a signal that says we can participate in that good market. The mark that the market went below that gold line. That would be a signal that we should probably be in cash. That would allow us to avoid a lot of volatility. Then, earlier in April we the market moves back above that line and we’re back into a-a, an environment where we’re confident that we can invest. And now we’ve gone below it and we’re back in cash. So, this is something that again doesn’t require a prediction or understanding the complexities of the market. It’s a very, very simple system that simply responds to what the markets doing, responds quickly, and is completely objective.
So, conclusion. I’ve said this a bunch of times today: you must have a predefined process, but you also must follow it. So, instead of having a diversified portfolio, we think you should identify your maximum exposure. Not every portfolio is going to be the same if you’re very conservative. Maybe you have 5 or 10% in stocks. If you’re very aggressive, maybe you do have 90 or 100% of your portfolio in stocks, so, use asset allocation to define your maximum exposure. Then you can start to diversify strategies, trend following strategy like we talked about that example. Momentum strategy growth versus value. Having some non-liquid investments in your portfolio like private real estate or private equity or private debt that that does not price daily like the-like the broad markets do and then you can diversify signals. You can have some shorter term signals that’s more responsive to the market. It’s going to cause a little bit more in’s and outs. You can combine that with some longer term signals that might have a little bit higher volatility but-but is a little bit less sensitive to the shorter term fluctuations. So, if you can-if you can put all these different things together, it can be a fairly simple strategy, but it will allow you to, again, participate in those good markets and manage risk in in the bad markets. We have a few more slides, but I think I’ll you know we’re at 12:40. I would like to open it up to some questions and you know, kind of respect everybody’s time here.
Jessica: Yeah, so we do have one inquiry about–and I think this is more related to, you know state of the market. It’s an election year. We’re coming up to it, you know, but what can we expect to see? You know, are there differences between who gets elected and what-what should we be mindful of?
Jim: Very-very, very common question that I’m hearing a lot right now. There’s a few different things I’ve got. I’ll go through one slide here in in a minute that I that I put together, but, specifically, with-with Trump versus Biden. The-I’ve seen some research that the common thing for Trump supporters is that if Biden is elected, the market is going to crash and the common theme with Biden, supporters of that is if Trump stays in president, the market is going to crash. Historically marked, the elections don’t have that much influence on stock prices. Historically, we get a little bit of a sell off between now and election. Kind of the Ford 8 weeks pre-election we see a little bit of a sell off. We’re kind of going along that same sort of rhythm this year. I have seen that this year, specifically, there are there is a tax, a potential tax difference with Presidents, so, Biden has come out and made some announcements that and has some policy ideas that he’s published publicly that would increase corporate taxes, especially. The analysis that I’ve seen done is that it would probably result in an 8% net valuation decrease for the S&P 500, whether that actually plays out like that, you know, I don’t know. Personally, I think that it is all about the Fed. The-the most important thing you can know right now is” what is the Fed doing? In the ten years prior-or following the financial crisis, the Fed printed about 3 1/2 trillion dollars, almost $4 trillion that they basically created from thin air electronically and it made its way into the stock market.
Over that 10 years of printing 4 trillion that led to the-one of the biggest and longest bull markets in history. Since April, they’ve printed 3 trillion. The market went up 60% because of it. It’s completely disconnected from the markets. I mean from the economy it’s-it’s disconnected from politics. It’s all about the Fed and this shows the Fed balance sheet, so, they’re up to $7 trillion that they’ve basically printed and flooded the markets with if-if the one of the two presidents were to change the Fed chair. I think the market would-would — that’s the most risk to the market. It may not be the right-it may be the right thing to do is to get somebody in there, like for example a-the extreme example would be Ron Paul. If we had a Ron Paul come in as Fed chair and he stopped printing in the tightened interest rates, we would see a massive market crash. There’s no reason to believe that if Trump or Biden are the next president, that they are going to shift the attitude of the Fed. Once people get in power, they don’t want the collapse to happen on their watch. So, Trump in-in 2016 was bashing the Fed and saying they were doing inappropriate things and they shouldn’t be printing all this money. He became president and he wants the Fed to print money because there is a direct-a direct result of that is that markets go higher. Fed is has announced that they will print another three or four trillion, so, they’ve already printed three trillion. They could print another three or four. I think this is really all you need to know about the current market environment. At some point this will-at some point it’s-it’s going to be bad. At some point you know printing-having this kind of policy, is it spiking the punch bowl at the party and you know they keep wanting to spike the punch bowl and extend the party out. At some point the party is going to be over. It it’s impossible to predict when that’s going to be. We could have already started the-the — if the market loses faith in the ability of the Fed to prop markets up, then it won’t matter who’s president, but as long as the market thinks in as long as the-the actual liquidity that’s being created in the Federal Reserve that is making its way into stock markets that’s causing prices to go higher, as long as that continues, we should expect markets to remain fairly stable and if not moving higher, there’s going to be periods of volatility like we’ve seen in that chart. But-but as I think, as long as the Fed is doing what the Fed is doing, I-I personally don’t think it’s going to matter who’s president?
Jim: Great question.
Jessica: Any other questions? Just go ahead and type them in in the Q&A box or the chat box? Just got a few more minutes before we have to wrap up.
Jim: If we don’t, I just want to say thank you all for attending. It’s-it’s-it’s an honor to get in front of everybody. Thank you, Jessica and Upside for having me. I will-my email is firstname.lastname@example.org. Feel free to email me with any questions following this. Jessica, I believe this is this is recorded and we’re going to be able to-to have this — we’ll send it out after-after it, you know, maybe take out take out some of my stumbles along the way, but this is recorded and we’ll send it out to everybody. But thanks everybody for joining.
Jessica: Yeah, we do have a question. And actually if you want to skip–go down to the very-very last slide we have your contact information on there. Do we get the last-did we miss that last line there out? There we go, there we go. So, we have Jim’s contact information there if you have questions. We do have another question that’s come in, before you rap up Jim — time to answer it.
Jessica: OK. The question is: how do you feel about real estate investments?
Jim: You kind of cut out there, Jessica.
Jessica: Sorry, the question was how do you feel about real estate investments?
Jim: I mean, I think you know real estate. It’s all about the piece of real estate itself. I mean, I think we’re in an environment where residential real estate has been absolutely on fire, you know? Personally, I might be a little skeptical about certain office real estate giving-given sort of a larger trend of work from home I do-I do think that one of the potential results of Covid is that more companies are going to reduce their footprint. But there are, you know, for example, we’re in Austin and real estate ultimately is about demographics and demographics here are very, very favorable. You know, I contrast Austin with Detroit, you know, over 50 years, Detroit had a very consistent migration of people out and away from their city. That’s not a good environment for real estate, but I think the right piece of real estate, interest rates are incredibly low. The Fed has said they’re going to keep interest rates low for another five years. Whether they can do that or not is another thing, but, you know, with-with-with plenty of liquidity flooding the markets with low interest rates, the right real estate deal is I think is a-can have some very-very nice returns.
Jessica: Yeah it definitely depends on the market where you’re looking to buy as well. Location, location, location.
Jim: I know Francisco right now. I would not want to be a real estate investor in San Francisco. Neither real estate office industrial. But like I say, Austin is continuing to be a beneficiary of the demographic shift away from the coasts, away from New York and Miami and Chicago and San Francisco and LA. And you know that is a favorable environment for real estate. So, I think just like anything, I think if you’re-if you’re selective and you have your right criteria in place, there’s plenty of opportunity out there. In real estate, you know, I, I personally think that the that the overall market in a lot of different risk assets has plenty of room to move higher. Again, our process is not dependent on that. Our process doesn’t really care what I think. But we just saw a 40% market crash six months ago. Those tend to not repeat themselves very frequently. You know, it would be a very, very rare event. It’s happened once in 200 years of recent market history that if the market were to experience another 30-40-50% decline, it would be the second time in history. The first time being 1929. The-so, with-with the liquidity out there we should expect some volatility. We never know when-when the next decline is going to happen, so, you need to have those preset strategies in place. But, you know, in–statistically speaking, we probably have a few years of-of, you know, flat to higher markets and I think that environment would be beneficial to real estate. I think that’s beneficial to stocks. Not beneficial to bonds. We personally don’t-don’t think bonds have a very good risk return at all, so we are very tactical with our bond exposure. But you know the overall environment despite the risks and because of the Fed looks fairly favorable and I would say I think if you just keep in mind: don’t stay invested too long and don’t stay in cash too long and try to develop a systematic process, you will benefit from it and you will participate in those-those times where it might be confusing and it might not make any sense, but your investment statement at the end of the month, it’s like there’s a saying in golf: that there’s no pictures on the scorecard, so, if you made par, even if you hit it off a tree and it’s, you know, went off a rock and-and somehow, luckily, went in the hole, it’s still a par. Your brokerage statement doesn’t care what-what you think about the market. It’s-it’s either up or it’s down, or it’s flat. So, let’s try to make it go up.
Jessica: And I’ll also reference our listener to are the person who asked the question we covered last month in one of our webinars. Just the state of the-state of the multi-family market specifically. And how you know in times of Pandemic and in times of, you know, whether it’s catastrophes like earthquakes and-and whatnot, how multi-family has been pretty stable. Everyone needs a place to live in the end, so, and it depends on what asset class. So, there’s that to keep in mind as well. One last question here: is-you-is the US economy and stock market going the direction as what Japan was in the 80s and 90s?
Jim: It could. It very well could be if you’re not familiar with-with Japan: the what-what happened in the 80s in Japan is that they embarked on a very aggressive money printing campaign. If you-if you remember, or if you’ve read about it, they bought Pebble Beach, they bought Rock Rockefeller Center, they were, you know, Sony came out. Everybody is excited about-about the companies that were happening and in Japan. The Nikkei, Which is the Japan stock market had a high point in 1991. And to this day it’s still 50% lower. So, it they-they are in a deflationary environment that they have not been able to get themselves out of they-they brought interest rates to zero again. They printed money but-but the-it was not a favorable environment at all, so, it-that is one of the scenarios that that could easily play out if the markets lose faith in the Fed’s ability to prop up markets by printing money, we could see a very long term period of U.S. stocks being flat to down, but kind of goes to that one chart that I-that I showed that, you know, there are 20-30 year periods where you don’t see any growth. And that is incredibly detrimental to-to an individual in a family. If you don’t have-if you’re not prepared to handle that kind of environment, you know I wouldn’t go through and-and necessarily predict that, but I do think that there ultimately will be consequences to what the Fed is doing. And it very well could play out like-like the 90s. Now a couple of different things that-that the US has, as far as an advantage over-over Japan, is a much more favorable demographic makeup. There was, you know, Japan very much was an aging population and they did not have sort of the baby boom Post World War Two. You know, a lot of economic activity is based on demographics. With the US following World War Two and the baby boomers, that was a lot of consumers, that was a lot of entrepreneurs, that was a lot of people selling stuff to other people and that caused a pretty big you know, 50 year generally rising stock market. The average boomer had two and a half kids, so, there was sort of a pig through the snake for a lack of a more appropriate analogy. You had this this this massive explosion in the population and then the boomers all had two and a half kids. And you’ve got this other massive explosion in the population. So, the demographics are-are the one thing that I would say would potentially not have the US follow in Japan’s path. From the from the 90s and two today, frankly. But that is death. There are a lot of similarities and if the market does not, if it starts to respond unfavorably to the Fed, we could easily go down that path. I don’t think that’s going to happen for a few years, though. I don’t-I don’t think that started today. I could easily be wrong, but I do think that we have a few years left before we start seeing the real consequences of what the Fed is doing.
Jessica: Wonderful. Thanks so much, Jim, for sharing your knowledge and providing some really helpful tips and giving some really good insight on how to protect our investments, especially in times of volatility. And thank you to our listeners for joining us. If you’d like to contact Jim, we’ve shared his contact information on the screen and let us know how helpful this content was by taking the short survey at the end of today’s session. And also let us know if you have any other financial and investment topics you’d like us to cover. Will find subject matter experts like Jim who can speak on these topics because at Upside Avenue, we’re committed to helping you live your Upside. So, watch your email for next month’s webinar and follow us on Facebook, Twitter, LinkedIn, and Instagram for the latest industry news and insights. And we also have a library of past webinars on our YouTube channel, so, discover your Upside with Upside Avenue through our non-traded REIT you can enjoy the benefits of real estate investing for as little as $2000, you can visit upsideavenue.com for more information or send us an email or call us. Thank you for joining us. Thank you again, Jim. Everybody, stay safe and we’ll see you next time.
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